Ratios in Balance Sheet Training

In the air right now traveling home from Phoenix after two great days doing my annual finance session at ISM. ISM is the International Sourcing Managers association. I have done two sessions there every year I think from 2007 to this year 2015 with a break in 2009 during the recession. As I walked through the conference several past attendees stopped me to reminisce about the great finance weather they experienced in past sessions.

We always sell a lot of Financial Intelligence books in their bookstore. This year when I dropped by before my first session they said they had sold my books out. I was very surprised. The conference went great, both sessions were well attended. As usual I had great discussions in the sessions in spite of fairly large groups.

This group comprises supply chain and sourcing professionals. Many of these folks are key purchasing managers in their organizations. It turns out that understanding how to work around the statements can be pretty important when making key sourcing and parenting decisions with potential partners and vendors. Certainly their business leaders need to find partners that are financially viable and can demonstrate strong financial acumen.

Many of these managers as in other disciplines know more about reading and measuring the income statements. For example, most are somewhat familiar with the income statement and the profitability ratios like operating profit margin percentage and net profit margin percentage. Of course these folks want their partners to make some profit on the business they provide but not an unreasonable profit. So these ratios can help a purchasing manager with negotiations.

The part of the financial statements less familiar is the balance sheet and the statement of cash flow. In our sessions we learn about metrics such as debt to equity and the current ratio from the balance sheet and operating cash flow or free cash flow from the cash flow statement.

The balance sheet lets us know if the partner is over-leveraged through the debt to equity ratio. The current ratio from the balance sheet lets us know if the business is going to struggle paying their bills in the short run. Both of these ratios are very important for a sourcing manager to understand to make sure their vendors are financially stable in the short run and long run.

The metric we talked about from the cash flow statement is free cash flow or operating cash flow. This number lets us know if the business generates cash. No cash generation means at some point payroll will be missed and the business will shut down. Not a good situation for a key supplier to their business.

The sessions were great and the weather could not be better and I had some great pizza at Pizzeria Bianco. Not a bad trip!

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Looking for training on the income statement, balance sheet, and statement of cash flows? At some point managers need to understand the statements and how you affect the numbers. Learn more about financial ratios and how they help you understand financial statements.